January 29, 2010

Why social media is 99% rubbish.

My year 9 physics teacher was wonderfully susceptible to running off on tangents mid lesson. Much to our delight, on the smallest prod from a disinterested classmate, the planned lesson, I assume there was one, would be replaced by a wide ranging discussion about his favourite topics or his gripe de jour. We didn't learn the whole year 9 physics syllabus but we did learn some interesting things about sailing, motorcycles, green house effect (back in the late 80s mind you!) and the poor quality of media and how we would be dumbed down and unable to think and learn if we believed the ever increasing rubbish on TV (back in the late 80s mind you!).

One of his many points, or what seemed like the grumbling of a tied old fool back then, was the law of quantity degrading quality. His fear was that the soon to be added 3 more TV stations to the airways would be wasted energy because it would not give extra quality just more rubbish. Of course this didn't sit very well with year 9'ers who only had access to 2 channels in the bush and ultimately didn't prove to be true at that time. But if any warning was ahead of its time (besides the small matter of the greenhouse effect) it must have been more information will make it harder to find the good information. What is valued now as information in the new world of social media and the every person has a voice in the narcissistic twitter culture is starting to stink. The more information out there it seems the less value it has.

Can you take the often thrown around stat that 90-95% of people lose at trading and apply it to internet discussion about trading? More and more I think it's on the money. Most people although reasonably intelligent fail at this game. Would it be reasonable to believe that what ends up on the internet in Blogs like this one and forums on trading is weighted towards the collection of work from the 5% that are successful, or is it closer to the representation of the collective participants? Being greatly outweighed by the losers?

A quick flick through a forum recently came up with this gem of a topic:

The single, most important thing you've learnt as a trader

Interesting enough discussion. You would expect some pearls of wisdom to be dropped in the 100 odd posts from some wise old heads. In fact the person that started the topic from his blog stated he was "a professional stock market trader" who is "available to speak at organizers events internationally ". WOW sounds just like the type of informative discussion that someone looking to learn trading would need. Towards the end of the discussion the original poster even put together 25 of "the most important things" raised in the thread. Great. Except it was a woeful listing of clichés and regurgitated same old same old bullshit that you hear from losing traders. Here is the list:

1. Money management2. Taking losses while small 3. Positive expectancy4. Importance of time out5. Market can do anything anytime6. Recognize your mistakes7. Never indulge in hope8. Keep things in perspective9. Concentration, patience10. Being humble11. Ride the trends 12. Define what success is, for you.13. Do your own research14. Use sound risk management15. Lock in your profits when they're there 16. Accept that you'll be wrong.17. Keep it simple you stupid!18. Sticking to your plan19. Contrary opinion20. Always have a good exit strategy21. Knowing when to stay out of the market22. Control your emotions23. Never average down.24. DISCIPLINE!25. Pyramiding profitable positions to maximize profits in the trade.

Ignoring that some points have a contradicting counterpoint (like 11, 15 & 25) we are supposedly talking about the most important thing. Now there's one unbelievable omission from the single most important thing list - it's the 1st and only rule that all businesses have, including trading: knowing how you will be profitable and why you will be profitable. Testing, break-even analysis, sales projection (back & forward testing for trading) these are the "most important things" when starting a business. Knowing that you will be profitable. You will get nowhere in the widget business selling widgets into the market that cost more to make than the sale price. Or the amount you have to sell to reach break-even is three times what the market will absorb. Or knowing how price increases of raw materials will affect profit. Or the size production you need to get over breakeven (small account anyone?)

Same with trading. If you don't know before you start that your cost of doing business (sum of losses & expenses) will be less than the sum of profits from winning trades, then you shouldn't be in business. If you don't know what makes that profit then you are clueless as to when your system is broken and likely to blow up. If you don’t first succeed on sim then you won’t do better live. Positive expectancy is no good if it doesn't get you over your running & living cost.

It’s amazing that the same old rubbish that gets spewed out by forum traders as to what is important. You would never get a business owner stating that the most important thing in business it to pay suppliers (take small losses #2). Thats not the most important thing, its just business, like opening the door in the morning on time, its just taking care of business. Yes the list has things in it that if ignored you will die in this game, like money management, but come on. How can so much "collective wisdom" be spewed up without one person stating what every business owners knows.

Income from Sales > Cost of expenses.

Doesn't matter about anything else if that's not true you will be broke very quickly. No matter how disciplined you are or how good your money management is you will still be broke.

Now there was one post saying with great sadness that no one has pointed out the need to test for profitability but it was just washed over in the tidal wave of what I suspect is people's own reflections of their failures. Just as Google will return a search of the most popular pages on a topic, not the "most true", and news pages can be customised to "feed" you the news you "want" but end up feeding you more of what you have already seen. I am afraid that web 2.0 is actually "feeding" more of the collective failures to the next lot of traders about to fail. Very little of it is authoritative, tested and proven successful information. Most of it is just like a Google search of the most popular and what's very popular in trading is failures.

Not to mention taxes! That can take a big chunk out of your profit. Here in Canada, we get taxed fully on profit but our capital loss credit is only a portion. So a profitable month may not be profitable at all if you forget to consider that.